Lecture material week 5

Question 1

Why protectionism?

Answer 1

• Societal demands
  – Protectionism as interest group politics – outcome of lobbying by…
• Uncompetitive industries, or
• Alliances of scarce factors of production
• Ideology and great power politics
  – Protectionism as a realist foreign policy strategy
• Relative vs. absolute gains
  – Economic sanctions
• Technocratic considerations
  – Protectionism as industrial development strategy
• Infant industry protection
  – Strategic trade policy

Question 2

Arguments for intervention

Answer 2

• Possible goals
  – Promote domestic production or employment
  – Infant industry protection – National security
  – Public revenue generation – Etc.
• Tools available
• Tariff and non-tariff barriers (import-restricting)
• Subsidies and industrial policies (export-promoting)

Question 3

Arguments against intervention

Answer 3

• It generally benefits only a small group and end up harming consumers and taxpayers (i.e. “silent majority”)
• They may harm economic performance – Evidence is mixed
• Rodriguez and Rodrik (1999):
  – Faster-growing economies are more open
  – But: correlation is not causation! (Reverse causality?)
  – Empirical evidence that imposition of tariff barriers harms growth is weak
• They are rarely an optimal solution
  – “Compensating losers”-strategy increases societal welfare more than “creating winners”

Question 4

Tools of protectionism

Answer 4

• Tariff barriers
• Non-tariff barriers (NTB)
  – Import quota
  – ‘Voluntary’ export restraints
  – Domestic content requirements
  – Product standard regulations etc.

Question 5

Tariffs in large vs small countries

Answer 5

• Very large markets have ‘monopsony’ power, i.e. they are price-makers rather than price- takers
• If consumer market is very large, foreign producers are willing to lower price in order to keep selling

Question 6

Export promotion

Answer 6

• Another way of “protectionism”: don’t limit imports, but artificially promote competitiveness of domestic firms to give them an advantage vis-à-vis foreign competitors
• Government subsidies to domestic exporters
• Cheap credits or insurance
• Tax credits
• R&D support
• Most in principle prohibited under WTO rules (but many exceptions)
• Welfare effects of export subisidies
  – They benefit [harm] domestic [foreign] producers, but harm [benefit]
  – Effects of export subsidies in competitive markets vs. situation of duopolies

Question 7

Katzenstein (1985)

Answer 7

• International economic integration is good for internationally competitive industries, but bad for less competitive ones: risk of industry closures and job losses
• Large economies can use protectionist tools to handle costs of adjustment induced by globalization
  – Some large economies committed to market solutions with ad hoc protectionism to “export” costs of adjustment, e.g. USA and UK
  – Some large economies prefer state coordination with systematic protectionism to “prevent” costs of adjustment: France, Japan
• Small economies cannot do that
  – Domestic market too small for self-sufficiency
  – No market power over foreign producers
• But despite structural vulnerabilities, some small Western European economies have performed extraordinarily well in post-war period
• paradox of (economic) strength of the (politically) weak
• What has been their solution?
  – To “live with” costs of adjustment
  – Instead of import restrictions, provision of domestic insurance mechanisms (e.g. unemployment benefits, free education, etc.) to protect citizens from trade-induced disruptions
• combination of economic liberalism and intl openness with high-tax domestic welfare states are not a contradiction - it is the latter that makes the former possible:
  – “political stability and economic flexibility … are not contradictory but mutually contingent” (24)
• Generous welfare provisions provide a ‘cushion’ that protects citizens from costs of adjustment
• It is this compensation mechanism that allows these countries to be open economically while preventing a political backlash

“democratic corporatism”